The Effects of Trade Liberalization on Wage Inequality and Informality in Indonesia: An Empirical Study

Feri Priantio

Economics and Finance in Indonesia, 2011, vol. 59, 145-176

Abstract: This study investigates the equity perspective of Indonesia’s trade liberalization. Using a two-stage estimation framework, the author exploited labor surveys and international trade data to examine how tariff reductions have influenced Indonesia’s wage inequality and informality during its 1995-2006 episode of liberalization. The results provide evidence that tariff reductions have ambiguously affected inequality among Indonesian workers. First, they have reduced inequality by causing workers of highly liberalized industries – in 1995, their industries were known as low-paying industries – to experience higher wage increases relative to the economy-wide average, thus narrowing the wage gap. Second, they have increased inequality by causing workers of these highly liberalized industries – in 1995, these industries were also known to have a relatively high probability of informal employment – to experience higher increases on the probability of informal employment relative to the economy-wide average.This means that these unfortunate workers were more likely to receive even lower payments, to be employed in poorer working condition and to be covered with less social protection

Keywords: Indonesia’s trade liberalization; Wage inequality; Informality; Two-stage estimation framework (search for similar items in EconPapers)
JEL-codes: F16 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:lpe:efijnl:201107

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